Exchange-traded funds can tap into Saudi Arabia’s market rally

Saudi Arabia’s main stock index, Tadawul All Shares Index, has been on a run, posting record highs amid a backdrop of strong performances in the energy and financial sectors, which are heavily weighted on the exchange. The index closed at the end of February at 12,590.3, its highest level in just over 16 years, up 11.6 percent on a year-to-date basis.
Benchmark indices that are designed to measure the performance of publicly-traded companies based in Saudi Arabia also reflected positive returns. The MSCI Saudi Arabia 20/35 Index rose by 12.53 percent in the year to the end of February, while the MSCI Saudi Arabia Index, was also up 12.53 percent over the same period. Both MSCI indices ended up over 37 percent at the end of 2021.

What is behind the rally?
Energy prices have risen sharply since they hit bottom in the second quarter of 2020, following the first few months of the pandemic. First, because supply was cut in reaction to low prices and then because demand recovered sharply as the global economy reopened. More recently, Russia’s invasion of Ukraine caused a further spike in energy prices, with West Texas Intermediate crude pushing past $100 per barrel on 24 February for the first time since 2014.
We calculate that each $10 increase in the price of oil adds around $325 billion to the world’s oil costs. Put another way, it provides a sizable boost to the producers of oil and Saudi Arabia accounted for 12 percent of world oil production in 2020, according to the US Energy Information Administration.
So, it is only natural that the Saudi economy benefits from higher oil prices and that energy stocks outperform in this environment. Both those factors suggest the Saudi stock market will continue to do well as long as oil prices remain at higher levels, which we think is more likely if there is a cut in Russian energy supplies to Europe.

Using exchange-traded funds
With energy prices rising, Saudi Arabia offers an attractive investment opportunity. Investors can gain exposure to the market rally in several ways, but access can be more easily accomplished using exchange-traded funds.
The ETF structure typically offers an efficient and relatively low cost, way of accessing markets — the Saudi Arabian market is no exception. An ETF is a fund that trades on an exchange, just like shares issued by a company, giving investors control over when and how they invest, with pricing available on the exchange throughout market hours where the ETF is listed.
Transparency has always been one of the main benefits of the ETF structure, with the full list of holdings published daily on the issuer’s website with clear index criteria that allows investors to understand what will and will not be included in the fund.
Since MSCI, a leading provider of global equity indices, upgraded Saudi Arabia to be included in the MSCI Emerging Markets Index in 2019, asset managers started to issue ETFs, giving foreign investors exposure to a market that was historically difficult to invest in.
There are several ETFs listed in both the US and in Europe that provide exposure to Saudi Arabia, whether part of an emerging markets index, or a Saudi Arabia pure play. Most ETFs aim to track a specific benchmark index less fees, for example, an ETF exposed to the Kingdom may aim to track the performance of the MSCI Saudi Arabia Index, and investors can see exactly what the fund is exposed to.
For an investor who wants to take a view on broad market directions, an ETF is an effective way to do so.

• Paul Jackson is global head of asset allocation research at Invesco. 

• Dr. Christopher Mellor is head of EMEA ETF equity & commodity product management at Invesco.